A Securities and Exchange Commission staff study of the stock market decline of September 11-12, 1986, attributed it to changes in fundamental economic perceptions; strategies involving stock index futures, the SEC found, contributed little to the magnitude of the decline, although they may have condensed the time period over which it occurred. But what of the much larger market decline of October 19?

Of the firms in the Commodity Futures Trading Commission’s large-trader reporting system, 12 broker/dealers and four portfolio insurers could be identified as principal futures market traders on October 19 and adjacent days; these 16 firms accounted for almost all stock index arbitrage and portfolio hedging by customers during the mid-October period. Data from them indicate that index arbitrage accounted for approximately 9 per cent of the NYSE’s volume on October 19. Portfolio insurance strategies accounted for 12 to 24 per cent of short-side volume in S&P 500 futures contracts on October 19; as such strategies do not involve related trading on the NYSE, these data are not expressed in terms of NYSE volume.

The CFTC is currently looking at the quantity and timing of arbitrage and portfolio insurance trading during the period surrounding October 19; the intraday level of stock and futures prices and the cash-futures basis; any evidence of a “cascade effect,” whereby futures market trading exacerbated stock market volatility; and the liquidity of futures markets.